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Offline theoretical



When BitUSD first launched, BitShares had an unrestricted short pricing policy whereby shorts were not charged interest and could be placed at any price.  This can be viewed as shorts competing by offering a discount to BitUSD buyers, with the largest discount orders getting filled first.

However, the unrestricted short pricing policy was later ended because a lop-sided market [1] was causing the discounts to be so large that they were effectively breaking the peg.

Currently, shorts only execute at the feed price, and compete based on the interest rate they offer.

These schemes both consist of shorts offering something to longs.  However there are two key differences:

- With unrestricted short pricing, the bid that matches the short gets the benefit.  With the current short interest implementation, the interest paid by the shorts is spread evenly across all BitUSD holders.
- With unrestricted short pricing, the shorter pays the BitUSD holder immediately.  With the current short interest implementation, the shorts pay the longs over time.

I'll discuss the implications, and possible design modifications, in a future post.

[1] In this case, many more BTS bulls were shorting the dollar than BTS bears buying BitUSD.
BTS- theoretical / PTS- PZxpdC8RqWsdU3pVJeobZY7JFKVPfNpy5z / BTC- 1NfGejohzoVGffAD1CnCRgo9vApjCU2viY / the delegate formerly known as drltc / Nothing said on these forums is intended to be legally binding / All opinions are my own unless otherwise noted / Take action due to my posts at your own risk

Offline biophil

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Re: Economic analysis of short interest vs. unrestricted short pricing
« Reply #1 on: November 19, 2014, 03:42:41 PM »
I look forward to said future post.

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zerosum

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Re: Economic analysis of short interest vs. unrestricted short pricing
« Reply #2 on: November 19, 2014, 07:20:24 PM »
drltc

As I highly doubt going back to the old system, I much rather see your thought/analyses of the 2x collateral vs 3x collateral:

As in greater security for the system due to the higher collateralization (how much greater) vs smaller interest amount the shorts are willing to offer for 1 bitUSD they short ( as they need 2x more capital to do so, in the 3x scheme), and other thoughts you might have on the subject.  Thanks.

Offline bytemaster

Re: Economic analysis of short interest vs. unrestricted short pricing
« Reply #3 on: November 19, 2014, 10:50:53 PM »
Not going back to the old system.

Making shorts pay the fee up front disincentives covering early and market making.

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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline theoretical

Re: Economic analysis of short interest vs. unrestricted short pricing
« Reply #4 on: November 24, 2014, 11:20:48 PM »
Not going back to the old system.

Making shorts pay the fee up front disincentives covering early and market making.

I wasn't seriously advocating going back to the old system.  Rather, comparing and contrasting the two systems led me to realize that there is a crucial difference between them with potential economic implications:

Under the old system, the discount (premium) is captured (paid) by the buyer, whereas the new system spreads it around to all BitUSD holders.

The ultimate effect of this is that the price signal of interest rates doesn't actually stimulate demand.  I.e. if the average yield for BitUSD is +5% APY but the top of the book is a short offering to pay 100% APR, nobody has an incentive to buy the order because their BitUSD will only get 5% (plus a tiny amount).

Let's say the 100% APR short pays K BitUSD over its term.  The BitUSD holders and the bidder buying the short would "want" to get together to make a mutually beneficial deal where the bidder buys the short, generating 0.95*K [1] in extra profits which the BitUSD holders and bidder split among themselves (the bidder wants some reward for tying up his capital for however long the short was alive).  There are a variety of ways you could potentially implement this.

This is closely related to the idea of a BitBond market.

[1] It's only 0.95*K because shorting new BitUSD into existence at 0% APR would lower the yield for a little bit, the APR offered by the new short must be greater than or equal to the average APR offered by all existing shorts in order to break even.
« Last Edit: November 24, 2014, 11:56:51 PM by drltc »
BTS- theoretical / PTS- PZxpdC8RqWsdU3pVJeobZY7JFKVPfNpy5z / BTC- 1NfGejohzoVGffAD1CnCRgo9vApjCU2viY / the delegate formerly known as drltc / Nothing said on these forums is intended to be legally binding / All opinions are my own unless otherwise noted / Take action due to my posts at your own risk

 

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